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General, Gifting

Gift duty – a tale of smoke and mirrors

From 1 October of this year, assets can be gifted to trust free of gift duty. Gift duty, was abolished because the Government was of the view that it was an inefficient tax that was easily avoided through gifting programs. For readers unfamiliar with gifting programs – this is how they worked:

If I gifted a house worth $135,000 to a trust before 1 October of this year that would be a dutiable gift, with gift duty payable on a sliding scale of up to 25%. However, if instead of gifting the house I sold the house, and then forgive the purchase price at the rate of $27,000 a year (the most you could gift previously without paying gift duty) then after 5 years the house is owned completely by the trust and I didn’t own anything.

Getting rid of assets through a gifting program was great for asset protection. Not so great perhaps for future creditors or partners. Gifting programs were not expensive, costing on average about $175.00 per gifting taxpayer. However, cumulatively that amounted to a nationwide cost of about $70 million a year. The Government decided that the cost outweighed any revenue stream and gift duty was abolished.

A lot has already been written about how with gift duty no longer applying people can use trusts to “hide assets” more quickly. For some that will be the case. However, for many people the abolition of gift duty may not be such a great thing after all.

There are lots of rules already in place that allow assets that are disposed of to avoid creditors, whether to a trust or elsewhere, to be clawed back. It’s just that these rules don’t get applied very much. There is a lot of belief that if there is a trust, the assets are too well protected and so creditors turn away. On closer inspection though, many trusts are little more than the smoke and mirrors in the title to this article. It’s a matter of knowing where to look.

Historically, with assets being gifted at the rate of $27,000 per year there was little reason to investigate creditor issues at the time any gift was made. However, now where substantial gifts can be made without gift duty applying, disadvantaged creditors may find that it is easier to overturn gifts to trusts.

For this reason anyone making a gift to a trust should take advice before making that gift. Equally, any person who feels disadvantaged because a debtor has gifted assets to a trust should also take advice.

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